iPhone for Christmas? Covid cases in China could force you to change your plans

iPhone for Christmas?  Covid cases in China could force you to change your plans
iPhone for Christmas?  Covid cases in China could force you to change your plans
  • The tightening of Covid-19 restrictions in China could lead to a 30% drop in production at Apple Inc’s largest iPhone factory in Zhengzhou.
  • Apple maker Foxconn may be forced to increase production at another factory in the city of Shenzhen to make up the shortfall.
  • Apple itself has warned of a Christmas slowdown.

Apple has based most of its supply chain in China, a strategy the company has I had intended to change for a long time. Until then, the US tech giant is inevitably exposed to Beijing’s rigid zero-Covid strategy. Apple Inc’s largest manufacturer, Foxconn, produces 70% of iPhone shipments globally. While the Taiwanese company also makes the device in India, Foxconn assembles most of its global production at its Zhengzhou facility in China.

Unfortunately, last week the plant, Apple’s largest, was rocked by discontent over strict measures to curb another Covid-19 outbreak. To top it off, a handful of highly sighted workers fled the site over the weekend after complaining via social media about their treatment and provisions. It began in mid-October when Foxconn was dealing with a Covid-19 outbreak at its facility in Zhengzhou, the capital of central China’s Henan province.

Workers were locked down to stop the spread of the virus to the outside world. Foxconn has repeatedly refrained from disclosing the number of cases. For context, under China’s ultra-strict zero-Covid-19 policies, localities must act quickly to quell outbreaks, with measures including large-scale lockdowns. Factories in affected areas can often remain open on the condition that they operate under a “closed-loop” system where staff live and work on site. The companies have said that such arrangements pose numerous difficulties.

As for Foxconn, the company had apparently banned dining in the canteens at the Zhengzhou plant since Oct. 19 and required workers to eat in bedrooms. The company still claimed that production was normal. Then came last weekend when social media exploded with photos and videos of workers leaving the Zhengzhou plant. Reports indicated they were seeking to escape hastily enacted Covid prevention measures that have left many of the 200,000 employees dealing with inadequate life conditions.

The reality was far from what the Taiwanese manufacturer painted The New York Times, where he said efforts to control the outbreak are apparently “progressing steadily” and quarantined employees are getting what they need, including “material supplies, psychological comfort, and responsive feedback.” Although Foxconn has not disclosed whether any workers at the Zhengzhou site had been diagnosed with the virus, authorities since Oct. 19 have reported 264 locally transmitted COVID-19 cases in Zhengzhou, the capital of central Henan province.

What lies ahead for the iPhone maker and its production base in China?

For a company whose smartphones have been mostly resilient to the global economic downturn, the unending outbreak of Covid-19 in China is finally hitting Apple, and it’s hitting them hard. For starters, iPhone sales in China fell 27% in the week ending October 24, and at the time, it was already the third week in a row of increasingly steep declines for Apple.

Considering it’s the time of year when Apple gears up for the holiday season, the Covid outbreak at its main Zhengzhou plant will inevitably affect production, further affecting sales. Some estimate that iPhone production could drop as much as 30% at its Zhengzhou plant. However, Foxconn shared that it was in control of the situation and would coordinate backup production with other plants to reduce any potential impact.

In hindsight, Apple has had a pretty good year, especially when it comes to its sales and market share in China. In the last three months of 2021, Apple became the best-selling smartphone brand in China for the first time in six years. For the second quarter of this year, Apple iPhones made up of half of all smartphones sold in China, a feat that it maintained until the third quarter of this year.

Between July and September 2022, Apple was the sole winner among China’s struggling smartphone vendors, as strong sales of the iPhone 14 drew a stark contrast to the weak performance of national brands. Things started to take a different direction in October, when Apple may have lost four to five percentage points in market share in the country, according to Edison Lee note from analysts at Jefferies on Sunday.

“While the iPhone used to be the bright spot, it has gotten less bright and recent data points indicate a risk that it could become the worst spot,” Lee wrote. “This is an incremental negative trend for the smartphone market, but a particular concern for the iPhone supply chain.” On the other hand, Morgan Stanley analysts believe there will be significant new developments as the fourth quarter is peak season for iPhone shipments.

“The potential impact on iPhone production is worth monitoring, as Zhengzhou is one of Hon Hai’s major production sites, particularly for iPhone assembly.” At the same time, Apple has also abandoned plans to ramp up production of its iPhone 14 family of products, according to a Bloomberg report last month. The holiday quarter is usually Apple’s biggest, accounting for about 30% of its annual revenue, as it launches iPhones and macbook before the shopping season.

However, this time, despite the company reporting better-than-expected results for the last quarter, Apple itself has warned of a Christmas slowdown as demand from China slows and inflation hits multi-decade highs. To make matters worse, if production in China is affected, the holiday season for many who intend to order Apple products, especially iPhones, may have to prepare for the wait.

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